to share home & bed .. and a business? co-owning a business with your spouse
Posted by Cedulie Lauman Esq at Wednesday, June 06. 2007 and is filed under entity selection,Thoughts and Tips,start up 
A few things converged to get me musing about husband-wife ownership teams. Besides my own (brief) experience with a husband & wife partnership, the Baltimore Sun recently had an article about a Maryland couple and the effects of their divorce on the lucrative business they built together; I am working with a company successfully run by a married couple and recent client inquires involved questions about how a couple could best structure a joint business.
First, the positive - have a harmonious common goal & keep the money in the family, right? If you get along smashingly with your spouse, never quibble about whose turn it is to take out the trash and compliment each other, why not work towards a common goal? Husband and wife LLCs are taxed by default as partnerships, although corporate taxation is possible. Some couples allocate things so that one is an owner, one an employee, while others look to classify one spouse in a "limited partner" role.
When such businesses go well, they go well. Your financial savvy and attention to detail matches his great ideas and people skills or vice-versa. But, human nature being what it is, when they go badly, they go very badly. The spouse who loves your input, praises your work, may (believe it or not) initiate all manner of "business" litigation against you, not to mention dragging in lawyers, accountants, appraisers and so forth. The above Baltimore Sun case involved a whole host of allegations, and in my experience threats, suspicions and actual "stealing" and "hiding" money surface when one spouse declares war.
Ever trying to mesh idealism with realism, my suggestion is this - if you have a great match & think owning a business together will work (and at least 2 friends or family members agree with your self assessment); go for it. But make sure everything is in writing - yup, have a detailed operating agreement or by-laws, describe exactly how the business decisions & money will be allocated, how conflicts will be resolved (arbitration, mediation, etc.) if they do arise, and how the interests will be allocated in the event of death/divorce/incapacity.
As an attorney, my job is to help clients achieve their goals, while raising issues they may not have analyzed on their own. So, if you are contemplating a joint venture with your spouse, do it by the books & let me know how it goes ...
First, the positive - have a harmonious common goal & keep the money in the family, right? If you get along smashingly with your spouse, never quibble about whose turn it is to take out the trash and compliment each other, why not work towards a common goal? Husband and wife LLCs are taxed by default as partnerships, although corporate taxation is possible. Some couples allocate things so that one is an owner, one an employee, while others look to classify one spouse in a "limited partner" role.
When such businesses go well, they go well. Your financial savvy and attention to detail matches his great ideas and people skills or vice-versa. But, human nature being what it is, when they go badly, they go very badly. The spouse who loves your input, praises your work, may (believe it or not) initiate all manner of "business" litigation against you, not to mention dragging in lawyers, accountants, appraisers and so forth. The above Baltimore Sun case involved a whole host of allegations, and in my experience threats, suspicions and actual "stealing" and "hiding" money surface when one spouse declares war.
Ever trying to mesh idealism with realism, my suggestion is this - if you have a great match & think owning a business together will work (and at least 2 friends or family members agree with your self assessment); go for it. But make sure everything is in writing - yup, have a detailed operating agreement or by-laws, describe exactly how the business decisions & money will be allocated, how conflicts will be resolved (arbitration, mediation, etc.) if they do arise, and how the interests will be allocated in the event of death/divorce/incapacity.
As an attorney, my job is to help clients achieve their goals, while raising issues they may not have analyzed on their own. So, if you are contemplating a joint venture with your spouse, do it by the books & let me know how it goes ...
Wow! I read your article and have a related question.
I am the sole owner of an S Corp in MD. My husband and I work together full time. He relinqued his ownership (25%) a couple of years ago because he declared bankruptcy. We have been separated for over a year and are actively seeking to sell the business.
Now he has decided that in order for him to "give his support to the sale" (which he already has been talking about doing), that I need to change the operating agreement so that it says he owns 49%.
I have NO problem in understanding that the business is a marital asset and he is entitled to half anyway. BUT, I feel this is a move to try and keep us together and that if I signed the document, he would decide NOT to sell anymore.
The question -- can I proceed on sale without his "support" OR if I did change the agreement, I assume that the divorce court would force us to sell the business anyway.
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To start, I am sorry to hear of your separation and the affect it has had on your business. Your question involves 2 separate (but intertwined) areas of law. As a general matter of corporate law, you do NOT need the approval of a non-owner (non stock holder) to sell your business, unless it was specifically required in the bylaws (highly unlikely). Generally speaking, you would not want to add more owners if you are planning on selling the business. In the muddier area of divorce law, Maryland courts can order you to pay part (often 50% but not always) of the value of "marital property," but cannot force you to transfer title to something you own individually. If you have agreed to sell and split the business proceeds, I would not do so until you have a written separation agreement detailing what is going to happen to the proceeds & any remaining assets. That being said, I also encourage you to ask your divorce lawyer for help in analyzing your assets. This post does NOT offer legal advice, although I don't mind pointing folks in the right general direction (even free of charge)! For a Maryland attorney to adequately analyze your situation and assets, he/she would need more info. It would be helpful if you do some legwork on your own and gather some basic info (may help keep your costs down). You will need more details both about the business and about your overall financial / marital picture. If you do not have an attorney and want to talk about the specifics of your situation, viewers of this post are welcome to contact the Office of Attorney Cedulie Laumann at www.elawmd.com or by phone at 410-216-7000. Contact through this site does not automatically create an attorney/client relationship, which is formed only if we meet and both agree.
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I was searching for info on husband/wife businesses when i came across your blog. I was hoping you could shed light on if I owned a business (sole-proprieter) and my wife or kids helped me out in this business, is it necessary to claim them as employees. I am sure I had seen somewhere (still searching for it) that family was able to assist in family business without being seen as employees of said business (being paid or having taxes paid on them). Have you heard of anything like this? Thanks for any info you can give.
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Great question.... the short answer is that immediate family members are the only "employees" you don't have to pay. So you can work 'em as much as they are willing to work! Of course, if you do pay them wages or a salary, you will need to follow the standard rules and take out taxes, etc.
On the separate but related issue of giving family members money, you remain free to give each family member a gift (even if it is a grown child out of the home) currently up to $12,000 per year per recipient totally free of federal gift taxes. (You should not do this as compensation for labor, but it does fit into an overall scheme of give & take between family members. Check out the federal gift tax law at www.irs.gov for more info.
In the State of Maryland, the Dept of Labor Licensing & Regulation (DLLR) puts out a free "fact sheet" which contains a summary of the law applicable to wages. You can find a downloadable link to the fact sheet at the following site... http://www.dllr.state.md.us/labor/wagehrfacts.htm If you want to look at the actual Maryland Wage & Hour Law, it can be found at §3–403 of the Labor & Employment Article in the Maryland Annotated Code.
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